Faced with excess inventory and heavy pricing pressure on its notebooks, computer maker Micron Electronics (MUEI) today said its first-quarter net profits will be "significantly" lower than those reported for the previous quarter.
The pricing pressure that is expected to cut into profit margins is not likely to abate in the near future, as the industry ramps up with new competitors stepping into the direct sales field. Computer giant Compaq and computer superstore CompUSA are just two of the new players that have stepped into Micron's territory recently.
"They try to be 5 to 10 percent below the competition on prices, but the competition has been responding," said Lou Mazzucchelli, an analyst with Gerard Klauer Mattison. "If someone keeps meeting your price, you have to keep going. And as inventory builds up, you have to keep prices low."
Micron, which has managed to post profits over three consecutive years, said it is holding excess inventory after sales it had expected did not materialize to the degree for which it had budgeted. The company noted, however, that unit shipments are expected to rise 30 percent over year-ago figures, and 10 percent over the previous quarter.
"Their unit volumes are up substantially year-over-year," Mattison said. "They thought they could grow faster than they did, and had increased expenses."
Robert Toomey, an analyst with Piper Jaffray, said Micron executives overshot their forecast in terms of how their advertising program would benefit sales.
"Demand was strong, but not enough to absorb the inventory they built," he said.
Toomey said Micron's future prospects depend on how successful the company will be in managing its manufacturing and operations.
"We have seen a few quarters in the past where they had some problems with their manufacturing and operations. This quarter they did not forecast well, and that hurt them," Toomey said. "A couple of quarters ago they implemented a new MIS system, but had trouble with it. When you need to turnaround orders in two weeks or so, you can't have inventory slowdown."
Toomey said the worst casualty of Micron's warning is that Wall Street now questions how successful they will be.
"It's become a show-me situation," he said.
Analysts had expected the company to post a profit of 22 cents in the first quarter, according to First Call.
Toomey said he has lowered his first-quarter estimate for the company to 5 cents a quarter, from 23 cents. He lowered his annual estimate as well, to 55 cents from $1.10.